Americans have record credit-card debt and banks are starting to sweat an uptick in default rates, reports Fortune's Peter Gumbel. Why some fear this could be the next subprime.

(Fortune Magazine) -- This past summer's subprime meltdown involved about $900 billion in now-suspect securitized debt, reckless lending, and consumers who buckled under the weight of
loans they couldn't afford. Now another link in the consumer debt chain - credit cards - is starting to show signs of strain. And the fear that the $915 billion in U.S. credit card
debt (an uncannily similar figure) may blow up has major financial institutions like Citigroup, American Express, and Bank of America strapping on their Kevlar vests.

Last month, as banks reported their worst quarterly results since 2001, concerns about rising credit card delinquencies began to make their way onto earnings announcements alongside
mentions of subprime woes.

In describing the situation to analysts, CFO Gary Crittenden said Citi's credit card holders were beginning to increase the balance on their cards or take cash advances on those cards
for the first time - behavior that, in his experience (which includes seven years as CFO of American Express), can translate into future trouble. Citi said the change in loan losses
was "inherent in the portfolio but not yet visible in delinquencies."

So are U.S. credit cards going to be the catalyst for the next seizing up of the global credit markets? It depends on whom you ask.

"We are in a heightened state of alert to monitor a potential domino effect," says Michael Mayo, Deutsche Bank's U.S. banking analyst.

Dennis Moroney, an analyst at TowerGroup, expects credit card delinquencies will rise as consumers, who have until now used home-equity lines of credit to pay off their cards, start
ratcheting up higher card debt. When housing prices were rising, it was easy for consumers to tap the escalating values of their homes to keep borrowing. With the home-equity spigot
turned off, over-leveraged consumers may have trouble keeping up with payments.

The doomsday scenario would play out something like this: Just like CDOs and other asset-backed securities, credit card debt is sliced, diced, and sold off again as packages of
securities. Rising delinquencies would hurt not only the banks involved but the securities backed by the credit card receivables. Those securities would decline in value as consumers
defaulted, leading to bank losses as well as portfolio losses in the hedge funds, institutions, and pensions that own the securities. If the damage is widespread enough, it could
wreak havoc on the economy much as the subprime crisis has done.

To be sure, there are key differences between the subprime market and the problems brewing with credit cards. The first is that while rising mortgage delinquencies were apparent for
months before the subprime market blew up, credit card delinquencies are actually coming off unusually low levels.

"This is absolutely not the next one to blow," says Meredith Whitney, banking analyst at CIBC. Christopher Marshall, CFO of Fifth Third Bancorp in Cincinnati, points out that the U.S.
has a long history of credit card securitization, "so it's fairly well understood." The securitization of the subprime sector, by comparison, "got blurry, and people didn't focus on
what it meant."

Credit agencies that monitor credit cards in the asset-backed securities market share that confidence. "The performance in the core consumer [asset-backed securities] sectors is
expected to deteriorate modestly, but not enough to cause substantial downgrades," says Kevin Duignan, managing director at Fitch.

But credit card debt is different from subprime debt in another way: Unlike mortgages, credit card debt is unsecured, so a default means a total loss. And while missed payments are at
a historical low, they show signs of an uptick: The quarterly delinquency rate for Capital One, Washington Mutual, Citigroup, J.P. Morgan Chase, and Bank of America rose an average of
13% in the third quarter, compared with a 2% drop in the previous quarter.

What's more, consumers and the people who market financial services to them may not have learned their lesson. Klaus-Peter Müller, CEO of Germany's Commerzbank, told Fortune he
was stunned on a recent trip to the U.S. to see TV ads still aggressively touting no-questions-asked credit. In Germany he's calling for tighter standards.

"I'm speaking out on the ethical questions about consumer lending," he says.

If there is an international precedent the U.S. should be watching, it's actually that of the U.K. British consumers are just as overstretched as Americans, but since the real estate
market there rose faster and fell earlier, they're about 18 months ahead in the credit cycle. Since the last quarter of 2005, credit card delinquencies and charge-off rates in Britain
have risen as much as 50%, forcing banks to take huge write-offs.

It's a sign of the times that, according to one survey last month, 6% of British homeowners have been using their credit cards to pay their mortgages. That's suicidal, of course,
given that credit card interest rates are more than double even the heftiest mortgage. Keep your fingers crossed that it's not a trend that crosses the Atlantic.